In an effort to ease the path for companies seeking to raise capital, securities regulators are going ahead with a new exemption that allows issuers to raise money from their existing shareholders without a prospectus.
Securities regulators in most Canadian jurisdictions, apart from Ontario (which is working on its own exemption for existing shareholders) announced Thursday that they are adopting Multilateral CSA Notice 45-312 – Proposed Prospectus Exemption for Distributions to Existing Security Holders that was proposed last year and received widespread support from the industry and investors.
“Many commenters said that the exemption would be beneficial to the public venture capital market by helping issuers (especially venture issuers) raise financing in a cost-effective manner. A number of commenters also noted the exemption would keep retail investors engaged. Many commenters urged us to adopt the exemption as quickly as possible,” the regulators report in a notice.
The new exemption will allow issuers listed on the Toronto Stock Exchange (TSX), TSX Venture Exchange (TSX-V), and the Canadian Securities Exchange (CSE) to raise money by distributing securities to their existing security holders, subject to certain conditions. Given the near-unanimous support for the idea, the regulators indicate that they have expanded the exemption to include the TSX and the CSE (the initial proposal only applied to the TSX-V), and they have done away with the sunset clause that was in the initial proposal (making the exemption permanent).
For now, regulators are maintaining the $15,000 limit for unadvised investments. Some commenters objected to the proposed limit. However, the regulators indicate that they are maintaining the limit, and will monitor the exemption’s use to determine whether to revise it in the future. They are also maintaining proposed resale restrictions, which require investors to hold their newly-issued securities for four months.
The regulators have also added a requirement that issuers must make offerings under the exemption available to all existing shareholders. “We think this requirement furthers one of the goals of the exemption, which is to promote fairness by giving investors who do not meet the criteria under other capital-raising exemptions the opportunity to participate in private placements,” the notice says.
Additionally, issuers will now have to disclose their approach to allocating over-subscriptions, “to help ensure fairness and transparency in how issuers deal with oversubscriptions”.
The Ontario Securities Commission (OSC) is not participating in this new exemption. It’s planning to publish its own similar exemption later this month as part of a bigger initiative to introduce four new prospectus exemptions (including a crowdfunding exemption, an offering memorandum exemption, and a family & friends exemption, along with an existing shareholder exemption). Its proposals are expected by March 20, the regulators suggest.
“The comments we received reflected overwhelming support for the proposed exemption, with many agreeing that it will reduce costs for investors and provide issuers with access to an additional source of financing,” said Bill Rice, chair of the Canadian Securities Administrators (CSA) and chair and CEO of the Alberta Securities Commission (ASC). “Certain changes to the exemption were made in response to suggestions that were submitted, including expanding it to include issuers listed on the TSX and CSE.”
The Investment Industry Association of Canada (IIAC) applauds the new exemption, noting that it “will assist issuers in the struggling venture market”, while also ensuring adequate investor protection. And, it notes that regulators moved quickly, taking just four months to adopt the exemption.
The IIAC says that it’s also looking forward to the OSC’s proposal for a similar exemption in Ontario, and it calls on Newfoundland to follow suit, “To make this exemption uniform for all listed companies and investors across the country.”